Related Party of a Company
Introduction –
In day–to–day business, every company enters into various transactions with various parties, either they are related to each other, or they hold common interests. However, those transactions are legal, as they may create a conflict or unfair situation, impacting the company’s financial position. Thus, to maintain transparency in the business and protect the stakeholders, Related parties are being regulated.
Section 188 of the companies Act, 2013, which specifically deals with related party transactions which further fascinate other provisions of the Act, including sections 166, 173, 177, and 184.
In this article, an attempt is made to explain Related Party, Related Party Transactions and their examples are given below -
Related Party Definition –
As per section 2(76) of the companies Act 2013, “related party,” concerning the company, means –
- a director or key managerial personnel or his relative;
- a firm where director, manager or his relative is a partner;
- a company where director, manager or his relative is a director or member;
- a public company where the director or manager is considered as a director and along with his relative holds more than 2% of its paid-up share capital;
- (a) Any corporate body whose Board of Directors, Managing Directors or Manager is confirmed to act related to the directions, instructions, or advice of a manager or a director. (b) any person whose directions, instructions, or advice of a manager or a director is confirmed to act.
Though, nothing contained in clauses (a) and (b) shall apply to the directions, instructions, or advice given in a professional capacity.
6. Any company that is either holding, subsidiary or an associate company of such a company or a subsidiary of a holding company is also a subsidiary.
7. Investing company or the venturer of the company.
To further explain, “Investing company or the venturer of the company” is a corporate body whose investment in the company will become an associate company of the corporate body.
8. Consider a director other than an independent director or key managerial personnel or his relative of the holding company.
Note: The term “relative” concerning the person includes Mother, Father, Son, Daughter, Son’s wife, Daughter’s husband, Sister, Brother, Husband and Wife, and members of HUF.
Examples of Related Parties are Below –
1. Mr. A, Mr. B, Mr. C are directors, and their relatives are considered related parties. Say, Mr. D is a Company Secretary, and the relatives will be considered as a related party.
2. Mr. A is a partner at XYZ. Pvt. Ltd, another firm. This firm will also be considered as a related party.
3. Mr. B is a director at B Pvt Ltd — In this case, B Pvt Ltd will become a related party. Even B’s relative is a member or director of B Pvt Ltd. The company will also be considered as a related party.
4. Mr. C and his relative hold more than 2% of the paid-up capital of C Pvt Ltd, then the C Pvt Ltd will also be considered a related party.
5. When E Pvt Ltd acts on the directions of Mr. A, then E Pvt Ltd will be considered a related party.
6. Mr. L holding 51% in ABC Ltd, on whose advice Mr. A has to act, will be considered a related party.
7. The below companies will be considered as related parties –
(a) LMN Ltd holding 51% in ABC Ltd (Holding Company)
(b) ABC Ltd holding 51% in DEF Ltd (Subsidiary Company)
(c ) XYZ Ltd holding 30% in ABC Ltd (Associate Company)
8. QPR & ABC are both subsidiaries of LMN Ltd. Thus, QPR also becomes a related party.
What is a Related Party Transaction?
Related party transactions are enclosed under 188 of the Companies Act, 2013, read the rule 15 of the Companies Rules (Meeting of Board and its Powers), 2014 that provides the details that the company cannot enter into any agreement or contract with a related party except with the prior approval of the Shareholders or Board as the case could be for the following transactions –
1. Purchase, sale or supply of any goods or any material, either directly or by appointment of any agent. And, if the limit transaction exceeds 10% or more of the company’s turnover, then approval from the shareholders is required.
2. Disposing of, selling or buying property of any kind either directly or appointment of any agent. And, if the limit transaction exceeds 10% or more of the company’s Net Worth, then approval from the shareholders is required.
3. Leasing of any property. And, if the limit transaction exceeds 10% or more of the company’s turnover, then approval from the shareholders is required.
4. Rendering or availing of any services, either directly or by appointment of any agent. And, if the limit transaction exceeds 10% or more of the company’s turnover, then approval from the shareholders is required.
5. Related party’s appointment to a place of profit or any office in the company, associate company or its subsidiary. And, if the limit transaction exceeds Rs. 2,50,000 at a monthly remuneration, then approval from the shareholders is required.
6. Underwriting of the subscriptions of any derivatives or any securities of the company. And, if the limit transaction exceeds 1% of the company’s Net Worth, then approval from the shareholders is required.
All the above limits are taken on the transactions of the financial year basis.
Note: The Net Worth or Turnover of the company should be taken based on the Audited Financial Statement of the previous financial year.
Examples of Related Party Transactions are Below –
Example 1 —
Company X has a 70% shareholding of Company Y. Company X sold the goods $6 million to Company Y during the financial year.
Solution: Company X is a holding company of Company Y as it has more than 51% shareholding of Company Y and transactions between Holding Company, which is X, and Subsidiary Company which is Y has to be disclosed in the Financial Statement of Company X and at the time while preparing of consolidated Financial Statement.
Company X shall disclose the related party transactions and their nature in its financial statement.
Example 2 —
XYZ Ltd. Has investment and holds 26% shareholding of ABC Ltd. And, ABC Ltd. hold shares 51% of CDE Ltd.
Solution: Company ABC Ltd. is an Associate Company of XYZ Ltd. as it has more than 20% shareholding of Company ABC Ltd. Transactions between these companies, i.e., XYZ Ltd and Associate Company which is ABC needs to be disclosed in the Financial Statement of Company of XYZ Ltd. and also, while the preparation of Consolidated Financial Statements.
All the related parties transactions among XYZ Ltd., ABC Ltd., and CDE Ltd have to be recorded in the financial statement because CDE Ltd. is a subsidiary company of ABC Ltd. and ABC Ltd is an associate company of XYZ Ltd.
Disclaimer —
The article is made out of relevant provisions. In no event, the author shall be liable for either direct or indirect results from this article. As the article is made to provide information, this is not a piece of any recommendation or professional advice.